Up until recently, China's economy, the fastest growing, has increasingly been seen as the engine of global growth. As the European crisis has led to the weakening of the euro and the strengthening of the US dollar, there have, however, been growing concerns in China that its growth could be blown off track, because with its currency tied to the rising US dollar, this would make its exports to Europe less competitive.

With the US economy, the locomotive of global production, weakened by the meltdown in the American financial system in 2008, and the loss of wealth by American consumers, China provided the strongest impetus to world demand last year. This was fuelled by the country's huge stimulus package and increased bank lending that boosted spending and accelerated the pace of economic growth in the second half of 2009. In the first quarter of this year, GDP growth increased further, reaching 11.9 per cent, putting the country back to pre-recession growth levels in 2007 and early 2008.

Fears of slowdown

This return of robust economic growth in China has spurred demand for commodities, boosting prices, pulling producing companies from financialdistress, and easing the economic pressure on developing countries. China's economic engine has also spurred demand for industrial goods from the US and other countries, and helped to lift world economic activity. But the fears are that its economy could hit a bump if exports to Europe, its largest market, are hurt, as the euro weakens and the value of the renminbi, China's currency, strengthens.

These fears of a slowdown in Chinese exports to Europe were part of the reason behind the recent abrupt decline in the Shanghai stock market, the world's best performing major market in 2009, that sent ripples through other Asian markets. The volatility in the Shanghai stock market was also reflecting concerns that the Chinese economy is overheating and the expectation that the government will further tighten credit.

Already, measures have been taken to slow down the rate of growth in bank loans, as aggressive lending last year that helped to revive China's building boom was feeding inflationary pressures. In the year ending April, property price inflation had actually risen to 12.8 per cent, the fastest in five years.

Since the upheaval that culminated in the confrontation in Tiananmen Square in 1989, the Chinese government has been nervous about rapid price increases as it is thought that those events were partly linked to anxieties provoked by runaway prices. It would also be wary that with bank lending soaring and a steep climb in retail sales, which went up 18.5 per cent in April, the risks of a bubble are increasing. A bubble would destabilise its economy, as happened in Japan in the early 1990s, with severe consequences for stability in this the world's most populous country where social ills related to the economic boom are soaring. One example is the precipitous increase in reported syphilis cases which, according to a recent article in the New England Journal of Medicine, is partly due to the fact that many rich men can now buy sex from poor young men and women.

Powerful impact

Should China's economy lose momentum, the impact on commodity markets would be powerful and swift. We should not be surprised by this, as it is now the leading producer and consumer of several of the world's most widely used metals, including aluminium, steel and copper. Its growing appetite for oil has also been the main factor behind the rebound in global oil consumption and prices. While countries, such as Jamaica, whose economies were jolted by the recession, have been encouraged by the recovery in commodity prices, they were becoming apprehensive about what had begun to look like a too-rapid climb in oil prices.

For the time being, the strengthening of the US dollar that has come about because of the uncertainties in the global economy has led to a softening of oil prices to under US$68 per barrel, coming down from over US$86 less than a month ago, a decline of nearly 21 per cent. The importance of this for the price of electricity in Jamaica, which is over 90 per cent dependent on oil as the source of fuel, should not be lost on us. Nor should we pass over the fact that while the local economy has been hurt by the global recession, the steep fall in oil prices which resulted has brought tremendous savings in the oil bill and eased the pressure on the foreign-exchange market.

Notwithstanding this positive side effect of the unsettled financial markets, Jamaica's economic fortunes are tied to the recovery of the international economy and its spill-over effects on demand for our exports and the flow of investment. China's continued strong growth will be critical to sustaining world economic recovery, and recent negative signs should be carefully watched.

Dennis E. Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.

Sourced from www.jamaica-gleaner.com